INTEREST-RATE DERIVATIVES AND ASSET-LIABILITY MANAGEMENT BY COMMERCIAL-BANKS

Bank participation in derivative markets has risen sharply in recent y ears. The total amount of interest rate, currency, commodity, and equi ty contracts at U.S. commercial and savings banks soared from $6.8 tri llion in 1990 to $11.9 trillion in 1993, an increase of 75 percent. A major concern facing policymakers and bank regulators today is the pos sibility that the rising use of derivatives has increased the riskines s of individual banks and of the banking system as a whole. This study uses quarterly Call Report data to shed some light on the pattern of derivative use by U.S. commercial banks. It finds that among banks wit h assets of less than $5 billion, larger banks tend to use interest ra te swaps more intensively, while no dear relationship was found betwee n size of bank and other interest rate derivatives. In addition, the s tudy found that for banks with more than $5 billion in assets, those w ith weaker asset quality tend to be more intensive users of derivative s than banks with better asset quality. However, the author points out that these results, while intriguing, do not give a clear indication of how derivatives are used to manage interest rate risk, or whether t hey are used to increase or reduce that risk.